365

JAMES F. AND LYNN M. MOSS, PETITIONERS v. 

COMMISSIONER OF INTERNAL REVENUE, 

RESPONDENT

Docket No. 26600–08. Filed September 20, 2010. 

Ps owned rental properties that generated losses for the 

year in issue. R contends that Ps are subject to the passive 

activity loss limitations of sec. 469, I.R.C. Ps offered a summary of the time P husband worked on the rental properties. 

The summary showed that P husband worked on the properties for less than the 750 hours required by sec. 

469(c)(7)(B)(ii), I.R.C. Ps, however, contend that, in addition to 

the time P husband actually worked, he was ‘‘on call’’ for work 

on the rental properties during the time that he was not at 

his full-time job and that the ‘‘on call’’ hours should count 

toward determining whether Ps meet the requirements of sec. 

469(c)(7)(B), I.R.C. Held: P husband’s ‘‘on call’’ time does not 

count toward satisfying the 750-hour requirement of sec. 

469(c)(7)(B)(ii), I.R.C., because P husband did not perform any 

actual work on the rental properties during the ‘‘on call’’ 

hours. Held, further, the losses from Ps’ rental properties are 

subject to the limited offset pursuant to sec. 469(i), I.R.C. 

Held, further, Ps are subject to the accuracy-related penalty 

366 135 UNITED STATES TAX COURT REPORTS (365) 

1 Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and 

Procedure, and all section references are to the Internal Revenue Code, as amended, for the year 

in issue. Amounts are rounded to the nearest dollar. 

2 A regular workweek is 5 regularly scheduled basic workdays of 8 hours each. Overtime is 

all hours worked outside of the regular workweek. 

for a substantial understatement of income tax pursuant to 

sec. 6662, I.R.C. 

James F. and Lynn M. Moss, pro sese. 

Kathleen K. Raup, for respondent. 

WELLS, Judge: Respondent determined a deficiency of 

$8,070 in petitioners’ Federal income tax for their 2007 tax 

year and an accuracy-related penalty pursuant to section 

6662(a) of $1,614. 1 We must decide the following issues: (1) 

Whether the loss of $40,490 claimed on petitioners’ Schedule 

E, Supplemental Income and Loss, should be disallowed 

because petitioners failed to meet the restrictions on passive 

activity losses under section 469; and (2) whether petitioners 

are subject to the accuracy-related penalty pursuant to section 6662(a) for the year in issue. 

FINDINGS OF FACT 

Some of the facts and certain exhibits have been stipulated. The stipulations of fact are incorporated in this 

Opinion by reference and are found accordingly. 

At the time the petition was filed, petitioners lived in 

Mullica Hill, New Jersey. 

Petitioner James Moss (Mr. Moss) works at a nuclear 

power plant in Hope Creek, New Jersey (Hope Creek plant), 

operated by Public Service Electric & Gas Co. Mr. Moss is 

employed as a ‘‘nuclear technician—planning’’. Mr. Moss 

plans maintenance activities, develops ‘‘work packages’’ that 

include estimates of job time and equipment to be used, and 

helps to ensure compliance with Nuclear Regulatory 

Commission regulations. 

During 2007, Mr. Moss was employed full time, 40 hours 

per week, generally working a shift of 7 a.m. to 3:30 p.m., 

Monday through Friday, for a total of approximately 1,900 

hours. As part of Mr. Moss’ duties at the Hope Creek plant, 

he also had to be available for ‘‘call out’’ time and ‘‘standby’’ 

time. Call out time occurs where an employee works 

unscheduled overtime. 2 Standby time occurs where an 

(365) MOSS v. COMMISSIONER 367

3Petitioners also sought a redetermination for their 2006 tax year in their petition to this 

Court. Because the petition was not timely filed as to that year, we dismissed that portion of 

the instant case for lack of jurisdiction. 

4Petitioners do not contend that sec. 7491(a) should apply in the instant case to shift the burContinued

employee is ordered to await a call for emergency work outside scheduled working hours. During standby time, an 

employee must be ‘‘fit for duty’’. Mr. Moss’ 1,900 hours of 

work during 2007 included approximately 200 to 300 hours 

of call out time. 

Petitioners own the following rental properties: (1) Four 

apartments at 301–303 2d Street, Swedesboro, New Jersey; 

(2) a single-family home at 1122 Elm Avenue, Wilmington, 

Delaware; (3) a single-family home at 1009 East 7th Street, 

Wilmington, Delaware; and (4) a single-family home at 611 

East 22nd Street, Wilmington, Delaware (collectively, rental 

properties). 

During his time away from work, Mr. Moss performed 

activities related to the rental properties. Mr. Moss’ activities 

regarding the rental properties included maintenance, monitoring, eviction of nonpaying tenants, collecting rents, and 

preparation for new tenants. During 2007, Mr. Moss kept a 

calendar detailing the dates that he performed the foregoing 

activities (calendar); however, he failed to include on the calendar the time spent performing such activities. On October 

23, 2009, Mr. Moss prepared a summary of the time he spent 

in connection with the rental properties (summary). 

Petitioners timely filed a joint Form 1040, U.S. Individual 

Income Tax Return, for their 2007 tax year (2007 return). 

Petitioners’ 2007 return was prepared by a certified public 

accountant (C.P.A.). On Schedule E attached to their 2007 

return, petitioners reported a total loss from the rental properties of $40,490. Respondent disallowed $31,318 of the loss, 

allowing a deductible loss of $9,172. 

Petitioners timely filed a petition in this Court seeking a 

redetermination of their liability for the year in issue. 3

OPINION 

Generally, the Commissioner’s determination of a deficiency is presumed correct, and the taxpayer has the burden 

of proving it incorrect. Rule 142(a); Welch v. Helvering, 290 

U.S. 111, 115 (1933). 4

368 135 UNITED STATES TAX COURT REPORTS (365) 

den of proof to respondent, nor did they establish that it should apply to the instant case. 

5 A rental activity is ‘‘any activity where payments are principally for the use of tangible property.’’ Sec. 469(j)(8). 

Deductions are a matter of legislative grace, and taxpayers 

bear the burden of proving that they have met all requirements necessary to be entitled to the claimed deductions. 

Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 

84 (1992). 

Taxpayers are allowed deductions for certain business and 

investment expenses pursuant to sections 162 and 212; however, section 469 generally disallows any passive activity loss 

for the tax year. A passive activity is any trade or business 

in which the taxpayer does not materially participate. Sec. 

469(c)(1). A passive activity loss is defined as the excess of 

the aggregate losses from all passive activities for the year 

over the aggregate income from all passive activities for such 

year. Sec. 469(d)(1). A rental activity is generally treated as 

a per se passive activity regardless of whether the taxpayer 

materially participates. 5 Sec. 469(c)(2). 

There are two principal exceptions to the general rule that 

rental real estate activities are per se passive activities: (1) 

Section 469(c)(7); and (2) section 469(i). Pursuant to section 

469(c)(7), the rental activities of a taxpayer who is a real 

estate professional are not per se passive activities but are 

treated as a trade or business subject to the material participation requirements of section 469(c)(1). Sec. 1.469–9(e)(1), 

Income Tax Regs. 

A taxpayer qualifies as a real estate professional and is not 

engaged in a passive activity under section 469(c)(2) if: 

(i) more than one-half of the personal services performed in trades or 

businesses by the taxpayer during such taxable year are performed in real 

property trades or businesses in which the taxpayer materially participates, and 

(ii) such taxpayer performs more than 750 hours of services during the 

taxable year in real property trades or businesses in which the taxpayer 

materially participates [750-hour service performance requirement]. 

[Sec. 469(c)(7)(B).] 

In the case of a joint return, the foregoing requirements for 

qualification as a real estate professional are satisfied if, and 

only if, either spouse separately satisfies the requirements. 

Id. Thus, if either spouse qualifies as a real estate profesVerDate 0ct 09 2002 13:30 May 29, 2013 Jkt 372897 PO 20009 Frm 00004 Fmt 2847 Sfmt 2847 V:\FILES\MOSS.135 SHEILA
(365) MOSS v. COMMISSIONER 369

sional, the rental activities of the real estate professional are 

not per se passive under section 469(c)(2). 

Section 1.469–5T(f)(4), Temporary Income Tax Regs., 53 

Fed. Reg. 5727 (Feb. 25, 1988), sets forth the requirements 

necessary to establish the taxpayer’s hours of participation 

as follows: 

The extent of an individual’s participation in an activity may be established by any reasonable means. Contemporaneous daily time reports, logs, 

or similar documents are not required if the extent of such participation 

may be established by other reasonable means. Reasonable means for purposes of this paragraph may include but are not limited to the identification of services performed over a period of time and the approximate 

number of hours spent performing such services during such period, based 

on appointment books, calendars, or narrative summaries. 

We have held that the regulations do not allow a postevent 

‘‘ballpark guesstimate’’. Bailey v. Commissioner, T.C. Memo. 

2001–296; Goshorn v. Commissioner, T.C. Memo. 1993–578. 

Respondent does not contend that petitioners have failed to 

elect to treat all of the rental properties as one activity. See 

sec. 469(c)(7)(A) (flush language); see also sec. 1.469–9(g), 

Income Tax Regs. (an election in a prior year is binding for 

the tax year it is made and for all future years in which the 

taxpayer qualifies). Accordingly, we deem that issue conceded. 

Petitioners contend Mr. Moss satisfies the section 469 

requirements of being a real estate professional. Petitioners 

provided the calendar and the summary as evidence of Mr. 

Moss’ time related to the rental properties during 2007. The 

calendar includes a description of the work that he performed on the rental properties and the dates on which that 

work was performed, but it does not include the amount of 

time that was spent in the performance of such work. 

According to the summary, petitioners estimate that during 

2007 Mr. Moss spent 112.25 hours traveling to and from the 

rental properties and 342.75 hours working on the rental 

properties. Additionally, petitioners contracted with Twin 

Hills Management to assist Mr. Moss with repairs. Mr. Moss 

contends that he spent 25.5 hours traveling to and from the 

rental properties with the Twin Hills employees and 165 

370 135 UNITED STATES TAX COURT REPORTS (365) 

6The time related to Mr. Moss’ work with Twin Hills is not the result of an estimate but rather was calculated from bills Twin Hills sent during 2007. 

7 Apparently, petitioners confuse the 750-hour service performance requirement of sec. 

469(c)(7)(B)(ii) with the call out and standby time policies of Mr. Moss’ employment at the Hope 

Creek plant. 

hours working alongside them. 6 Mr. Moss contends that he 

spent 137.75 hours traveling to and from his rental properties and 507.75 hours working on his rental properties, for 

a total of 645.5 hours. 

The total of 645.5 hours is less than the 750-hour service 

performance requirement of section 469(c)(7)(B)(ii). However, 

to satisfy the remaining time requirement, petitioners contend that Mr. Moss was ‘‘on call’’ for the rental properties for 

all of the hours that he was not working at the Hope Creek 

plant in his regular job. Essentially, petitioners claim that 

Mr. Moss could have been called to perform work at the 

rental properties at any time that he was not working at

the Hope Creek plant, and, therefore, such on call hours 

should count toward meeting the 750-hour service performance requirement. We do not agree with petitioners’ contention that Mr. Moss’ ‘‘on call’’ hours may be used to satisfy the 

750-hour service performance requirement. Section 469(c)(7) 

applies where the taxpayer ‘‘performs more than 750 hours 

of services’’. Sec. 469(c)(7)(B)(ii) (emphasis added); see also 

sec. 1.469–9(b)(4), Income Tax Regs. (‘‘Personal services

means any work performed by an individual in connection 

with a trade or business’’ (emphasis added)). While Mr. Moss 

was ‘‘on call’’ for the rental properties, he could have been 

called in to perform services; however, these services were 

never actually performed by him. 7 Accordingly, we conclude 

that Mr. Moss’ time ‘‘on call’’ for the rental properties does 

not satisfy any part of the 750-hour service performance 

requirement. 

Additionally, petitioners claim that Mr. Moss’ calendar and 

summary reflect only 75 percent to 85 percent of his time. 

However, petitioners failed to provide any further information regarding other personal services Mr. Moss may or may 

not have performed with respect to the rental properties. On 

the basis of the record, we conclude that petitioners have 

failed to show that Mr. Moss met the 750-hour service 

performance requirement of section 469(c)(7)(B)(ii) for the 

year in issue. Because petitioners have failed to show that 

(365) MOSS v. COMMISSIONER 371

Mr. Moss met the 750-hour service performance requirement, 

we hold that he is not a real estate professional for purposes 

of section 469(c)(7) and that petitioners’ rental real estate 

activities must therefore be treated as a passive activity 

under section 469(c)(2). Consequently, it is not necessary to 

address whether Mr. Moss spent more than 50 percent of his 

time in the real estate trade or business or whether he materially participated in that business. 

The second exception to the general rule that rental real 

estate activities are per se passive activities is provided in 

section 469(i)(1), which provides as follows: 

(1) IN GENERAL.—In the case of any natural person, subsection (a) shall 

not apply to that portion of the passive activity loss or the deduction 

equivalent * * * of the passive activity credit for any taxable year which 

is attributable to all rental real estate activities with respect to which such 

individual actively participated in such taxable year * * *. 

The section 469(i) exception is limited to $25,000. Sec. 

469(i)(2). The $25,000 maximum ‘‘offset’’, however, begins to 

phase out for taxpayers whose adjusted gross income (AGI) 

exceeds $100,000 and is completely phased out for taxpayers 

whose adjusted gross income is $150,000 or more. Sec. 

469(i)(3)(A). For that purpose, adjusted gross income is 

derived without regard to ‘‘any passive activity loss or any 

loss allowable by reason of subsection (c)(7)’’ (modified AGI). 

Sec. 469(i)(3)(F)(iv). We have said that the active participation standard is met as long as the taxpayer participates in 

a significant and bona fide sense in making management 

decisions or arranging for others to provide services such as 

repairs. See Madler v. Commissioner, T.C. Memo. 1998–112. 

During 2007, Mr. Moss actively participated in the rental 

properties by personally maintaining them as well as performing other managerial functions. As concluded above, Mr. 

Moss’ rental real estate activities are section 469(c)(2) passive activities, and therefore the losses from the rental property claimed on Schedule E of $40,490 should be added back 

to petitioners’ AGI of $91,166 to determine their modified AGI. 

See sec. 469(i)(3)(F)(iv). Adding back the Schedule E losses to 

petitioners’ AGI yields a modified AGI of $131,656. Because 

petitioners’ modified AGI exceeds $100,000 by $31,656, the 

$25,000 allowable loss amount must be reduced by 50 percent for each dollar of modified AGI that exceeds $100,000, or 

372 135 UNITED STATES TAX COURT REPORTS (365) 

8This is the amount respondent allowed in the notice of deficiency. 

9This is the $40,490 reported as loss on Schedule E minus the $9,172 allowable loss. Any passive activity loss that is disallowed is treated as a deduction allocable to such activity in the 

next taxable year. Sec. 469(b). 

$15,828, to an allowable loss of $9,172. See sec. 469(i)(3)(A). 

Consequently, on the basis of our holding above and the foregoing calculation, we sustain respondent’s determination that 

petitioners have an allowable loss for their rental real estate 

activities of $9,172 8 and a disallowed loss of $31,318. 9

Pursuant to section 6662(a) and (b)(1) and (2), a taxpayer 

may be liable for a penalty of 20 percent on the portion of 

an underpayment of tax: (1) Due to negligence or disregard 

of rules or regulations or (2) attributable to a substantial 

understatement of income tax. ‘‘Negligence’’ is defined as any 

failure to make a reasonable attempt to comply with the 

provisions of the Internal Revenue Code, and ‘‘disregard’’ 

means any careless, reckless, or intentional disregard. Sec. 

6662(c). ‘‘Understatement’’ means the excess of the amount of 

the tax required to be shown on the return over the amount 

of the tax imposed which is shown on the return, reduced by 

any rebate. Sec. 6662(d)(2)(A). A ‘‘substantial understatement’’ of income tax is defined as an understatement of tax 

that exceeds the greater of 10 percent of the tax required to 

be shown on the tax return or $5,000. Sec. 6662(d)(1)(A). The 

understatement is reduced to the extent that the taxpayer 

has: (1) Adequately disclosed his or her position and has a 

reasonable basis for such position, or (2) has substantial 

authority for the tax treatment of the item. Sec. 

6662(d)(2)(B). With regard to the accuracy-related penalty, 

respondent bears the burden of production pursuant to section 7491(c), and petitioners bear the burden of proof. See 

Higbee v. Commissioner, 116 T.C. 438, 446 (2001). 

The accuracy-related penalty is not imposed with respect 

to any portion of the underpayment as to which the taxpayer 

acted with reasonable cause and in good faith. Sec. 

6664(c)(1). The decision as to whether the taxpayer acted 

with reasonable cause and in good faith depends upon all of 

the pertinent facts and circumstances. Sec. 1.6664–4(b)(1), 

Income Tax Regs. Relevant factors include the taxpayer’s 

efforts to assess his proper tax liability, including the taxpayer’s reasonable and good faith reliance on the advice of a 

professional such as an accountant. Id. Furthermore, an 

(365) MOSS v. COMMISSIONER 373

10Petitioners allege that the IRS misaddressed documents, spelled petitioners’ name wrong on 

documents, and would not ‘‘give you a straight answer’’. 

honest misunderstanding of fact or law that is reasonable in 

the light of the experience, knowledge, and education of the 

taxpayer may indicate reasonable cause and good faith. Sec. 

1.6664–4(b)(1), Income Tax Regs. 

On the basis of the record, we conclude that petitioners’ 

understatement will be greater than $5,000. See sec. 

6662(b)(2), (d)(1)(A)(ii). Therefore, we hold that respondent 

has met his burden of production regarding the accuracyrelated penalty pursuant to section 6662(a). 

As to petitioners’ burden, they contend that they qualify 

for an exception to the accuracy-related penalty. Petitioners 

contend that the accuracy-related penalty should be waived 

because they were allegedly mistreated by the Internal Revenue Service (IRS). 10 However, the IRS’ treatment of petitioners is not relevant to the reduction of the accuracyrelated penalty pursuant to section 6662(d)(2)(B) or section 

6664(c). Both exceptions relate to the taxpayer’s actions, not 

the Commissioner’s actions. See secs. 6662(d)(2)(B), 6664(c). 

Accordingly, we conclude that petitioners have failed to prove 

that they had a reasonable basis or substantial authority for 

deducting the losses claimed on Schedule E. See sec. 

6662(d)(2)(B). Mr. Moss also testified that he relied on his 

C.P.A. to determine whether he was a real estate professional; however, he also testified that he did not provide his 

C.P.A. with the number of hours that he spent working on 

the rental properties. Therefore, we conclude that petitioners 

have also failed to show that they acted with reasonable 

cause and in good faith in deducting the losses claimed on 

Schedule E. See sec. 6664(c)(1). On the basis of the record, 

we hold that petitioners are liable for the accuracy-related 

penalty pursuant to section 6662(a) for the year in issue. 

The Court has considered all other arguments made by the 

parties and, to the extent we have not addressed them 

herein, we consider them moot, irrelevant, or without merit.

374 135 UNITED STATES TAX COURT REPORTS (365) 

On the basis of the foregoing, 

Decision will be entered for respondent. 

f